Graft-vs-host disease (GVHD) remains the most life-threatening complication following the transfer of allogeneic bone marrow into immunocompromised hosts. Transferred alloreactive T cells respond in a complex manner. While massive T cell expansion is observed upon entry into an allogeneic environment, anergy, apoptosis, and repertoire selection are also observed. The study presented here shows that alloreactive T cell expansion and differentiation vs anergy and suppression are dramatically influenced by host conditioning. Using alloreactive CD4+ and CD8+ TCR transgenic (Tg) T cells, a novel GVHD model is presented that allows for the visualization of how alloreactive T cells behave when host conditioning is manipulated. Following the transfer of alloreactive CD4+ and CD8+ TCR Tg T cells into sublethally irradiated hosts, both Tg T cells populations expand, develop effector function, and cause GVHD. In contrast, when Tg T cells are transferred in non-irradiated hosts, expansion is observed, but there is no development of effector function or disease. Assessment of CD4+ Tg T cell function following transfer into non-irradiated hosts reveals that these CD4+ Tg cells are profoundly anergic and have acquired a regulatory function, as manifested in their ability to suppress the expansion of naive TCR Tg T cells in vitro and in vivo as well as the development of GVHD. These findings underscore the decisive effect of the inflammatory environment created by irradiation in determining the ultimate fate and function of alloreactive T cells in vivo.